Inheritance Tax May be coming to India

One of the most recent and hotly debated topic of discussion is the Inheritance tax. This assumes significance especially with fresh data coming in and reports of Oxfam International which points out to the huge disparity of Income & wealth in India & World. This may force the Governments all round the Globe to have a fresh look at the Inheritance Tax and in India it assumes greater significance in view of the budget around the corner.

No body can answer the question whether the present Government will reintroduce the Inheritance tax and in what form but as practitioner of law and students it is interesting to know the various facets of Inheritance Tax.

What Exactly is Inheritance Tax

Inheritance Tax simply put is a tax on the estate of a person who has died.

It is a tax levied on the value of Assets which have been inherited by the Legal Heirs.

For India Inheritance tax if it comes would be nothing new.

India had Estate duty or Estate tax inheritance tax for 33 years from 1953 to 1986 against inheritance of a particular asset. It was abolished in India by the government as it failed to reduce wealth inequality. Similarly The gift tax, which was first introduced in 1958was scrapped in 1998 considering the meager revenue generated, and the difficulty in administering gift tax. Though Gifts in certain circumstances are now taxable by virtue of section 56 of the Income Tax Act, 1961.

Countries like United kingdom, USA, France, Spain, Japan, South Korea are having inheritance tax in one form or other. The Tax rates vary from country to country for e.g U.K has a tax rate of 40%. Japan has a very high rate of 55% (on slab basis). Similarly USA has a top tax rate of 40%. The Exclusions and threshold limits are available but the taxes in these countries have a combination of Gift & Inheritance Tax. Some of the Tax jurisdictions like Australia, Hongkong, New Zealand, Norway have repealed the Inheritance Tax.

Income & Wealth Inequality

The Oxfam International Report1 released on 22'nd Jan 2018 coinciding with the World Economic Forum in Davos, Switzerland reveals how the global economy enables a wealthy elite to accumulate vast fortunes while hundreds of millions of people are struggling to survive on poverty pay.

The Key highlights of the report are:

♦Eighty two percent of the wealth generated last year went to the richest one percent of the global population, while the 3.7 billion people who make up the poorest half of the world saw no increase in their wealth, according to a new Oxfam report released today.

♦Billionaire wealth has risen by an annual average of 13 percent since 2010 – six times faster than the wages of ordinary workers, which have risen by a yearly average of just 2 percent. The number of billionaires rose at an unprecedented rate of one every two days between March 2016 and March 2017.

♦It takes just four days for a CEO from one of the top five global fashion brands to earn what a Bangladeshi garment worker will earn in her lifetime. In the US, it takes slightly over one working day for a CEO to earn what an ordinary worker makes in a year.

♦It would cost $2.2 billion a year to increase the wages of all 2.5 million Vietnamese garment workers to a living wage. This is about a third of the amount paid out to wealthy shareholders by the top 5 companies in the garment sector in 2016.

The richest 1 per cent in India cornered 73 per cent of the wealth generated in the country last year,

Approximately 1/3'rd of the billionaire wealth is derived from inheritance.

In another report of 2016 -The India-specific finding of the 'World Inequality Report 2018' authored, among others, by noted economists Thomas Piketty and Lucas Chancel it was stated that Top 10% have 55% of India's wealth2 Income inequality in India has increased since deregulation started in the 1980s, with the top 10 per cent of earners accounting for 55 per cent of the national wealth in 2016.

Arguments For and Against

The Economists argue that Inheritance Tax is a must for countries like India so that there is equitable distribution of Wealth pointing to reports like above. With the The abolition of Wealth Tax and Gift Tax they say time is now ripe for re introduction of Inheritance Tax.

On the Other hand of the spectrum are the proponents which argue that the proposed tax is Economically Inefficient. They point out that the experiment in the past have not yielded any fruitful results. It would Create jobs only for Lawyers and Accountants. It would encourage Tax avoidance. They argue that in India there is no social Security as compared to the tax jurisdictions which are developed and have a strong and robust Social Security system in place therefore India cannot be compared with those jurisdictions.

Tax Perspective

From a Tax perspective World over Trusts are used as a medium to Ring Fence the Assets for the family. It is an established tool of estate planning.

In India also the Family Trusts are prevalent and widely used for Succession Planning and also for meeting Family and Social obligations. Family Trusts are being used mainly for ensuring that the ownership of Companies and assets remain with the Family.

Going by the News paper Reports, the news of inheritance tax has already led to a spurt in creation of family trust.

The Law Governing the Family Trusts or private trusts( where the beneficiaries are not public at large ) is the Indian Trusts Act,1882.The Indian Trusts Act 1882 is based upon the principles administered by the English Courts of Equity under the name of Justice, Equity & good conscience. Trusts are based on law of equity rather than the law of contracts. A trust is a relationship in which a person or entity ('the trustee') holds legal title to certain property but is bound by a fiduciary duty to exercise that legal control for the benefit of one or more individuals or organizations ('the beneficiary') The beneficiary holds the "beneficial" or "equitable" title governed by the terms of the (usually) written trust instrument and proper law.

Briefly Stated the structuring of the Trusts would depend upon the aims and objectives of the settler. The trust can either specific or discretionary. In a discretionary trust beneficiary has no right to any part of the Income. It is left to the discretion of the Trustee as opposed to a specific trust where the beneficiaries are specifically identified. The Trusts can also be created for the benefit of the minors. Even business can be settled or carried out in the Trusts. While drafting and structuring the Trust Deed care has also to be taken of the Provisions of the Transfer of Property Act, 1882.

Under the Income Tax Act, 1961 ("The Act") the Private Trust would become a separate tax entity. The settlement of property with the Trust are now dealt by Section 56(2) (x) of the Act which provides for a specific exclusion where the trust is settled by an Individual for the benefit of relative then the receipt by the trust from such individual would not be considered as Income. The exclusion is by an Individual only and not if it is contributed by other entities.

The provisions and taxability of private trusts under the Income Tax Act depends upon whether the share of beneficiaries are determinate or whether the shares are indeterminate or unknown. Section 161 and Section 164 of the Act deal with the taxability :

Where Shares of beneficiaries are determinate Section 161

Section

Situation

Provision

161(1)

Where trust income does not include business
Income

Assessment to be made on the trustee as
Representative Assessee u/s 161 at rates applicable to the total income of
each beneficiary. However in terms of section 166 department has the option
of making a direct assessment in the hands of each beneficiary entitled to
the income.

161(1A)

Where trust income does include business
Income

Tax to be charged at Maximum Marginal rates
subject to exceptions as provided.

Where Shares of beneficiaries are indeterminate or unknown Section 164

Section

Situation

Provision

164(1)

Where trust income does not include business
Income

Trustee is liable to be taxed as a representative
assessee at the maximum marginal rate subject to exceptions as provided.

Proviso

Where trust income does include business
Income

Tax to be charged at Maximum Marginal rates
subject to exceptions as provided.

Challenges and Conclusion

The dilemma which the Government now faces is overwhelming pointers to the inequitable distribution of wealth and economic arguments against the Inheritance Tax. No doubt it will be difficult balancing Act both on the Socio as well as Economic Front.

If the Inheritance Tax becomes a reality the challenge on the legislative side would be many including the valuation of the estate which is going to be one of the key features. The other aspect would be threshold limit, rates and exemptions for easy and effective compliance.

Presently all the above is hypothetical and we will have to wait & watch for the briefcase to open on 1'st Feb 2018.